Apple: the first $700 billion company

Apple has become the first U.S. company with a market value above $700 billion, adding to an already long list of achievements for the electronics titan.

The company’s shares rose nearly 2% to $122.02 Tuesday, nudging its market capitalization to just under $711 billion.

Market capitalization – or the value placed on the company by investors – is calculated by multiplying the share price by the number of shares outstanding. Apple’s dwarfs that of virtually all companies, including its closest rivals for the title of most valuable business.

Oil giant ExxonMobil XOM has a market capitalization of $382 billion, for example. Meanwhile, Google GOOG comes in at $365 billion while Microsoft MSFT is valued at $349 billion.

Apple’s value has increased dramatically since it started to turn its business around more than a decade ago with the introduction of the iPod. It has since conquered mobile phones and tablets, and is plotting to take on the nascent smartwatch category.

But for a few blips over the years, Apple shares have been on a tear. Since 2000, they’ve risen nearly 120-fold. Just four years ago Apple’s market value crossed $300 billion for the first time. Now it’s more than double.

During that run, Apple has shattered a number of business records. Last month, for example, Apple reported $18 billion in quarterly profits, the most of any company in history, based on record sales of 74.5 million iPhones.

Apple’s has been flirting with a $700 billion market value for a while. It briefly crossed the threshold during mid-day trading last week and, before that, in November. But it failed to hold those gains through the end of the day. Tuesday marks the first time it did so at the close of trading.

The achievement brings up an inevitable question: How much higher can Apple go?

The merger will allow the oilfield services company to take on market leader Schlumberger NV.

Over the years, including as recently as this summer, there have been massive restructuring plans and acquisitions by oil companies seeking an advantage in the energy industry. Here’s a roundup of some of the biggest transactions, according to Bloomberg data.

Kinder Morgan (2014)

Kinder Morgan KMI underwent a $70 billion reorganization in August, buying out its sprawling assets and consolidating into a single entity. Those transactions amounted to the second largest energy deal in history, according to information compiled by Bloomberg. Kinder’s objective was to consolidate its assets, creating a $44 billion energy giant. The combined company took on around $27 billion in debt held by individual partnerships, according to a Fortune story about the announcement.

“In the opportunity-rich environment of today’s energy infrastructure sector, we believe this transaction gives us the ability to grow KMI for years to come,” said CEO Richard Kinder in a statement.

ChevronTexaco (2000) and Socal-Gulf (1984)

At the turn of the century, Chevron CVX and Texaco merged, creating what’s currently the second largest U.S. energy company (it trails ExxonMobil on the Fortune 500). The deal was valued at $45 billion, bringing into existence a new company with a market capitalization of $97 billion. “Our goal is to be No. 1 in total stockholder return among our industry competitors. With this merger, two companies with a long history of partnership will join together to create greater value for our stockholders and put us on the path to our goal,” said CEO Dave O’Reilly at the time.

Before Chevron became Chevron, however, the company was known as Standard Oil Co. of California, or Socal. The company made history in 1984 by merging with Gulf, the fifth-largest petroleum company in the U.S., in what was the biggest corporate merger at the time, according to the company’s website. After Socal made a $13.3 billion bid and won, the new corporation changed its name to Chevron.

ExxonMobil (1998)

In the largest energy transaction in history, Exxon merged with Mobil in 1998 in a deal worth $81 billion. Antitrust issues held up the deal for nearly a year, and the two companies ultimately sold a total of over 2,400 stations across the U.S. to appease the Federal Trade Commission, according to an FTC statement released at the time.

FTC chairman Robert Pitofsky explained the thinking behind the required restructuring at the time: “Because Exxon and Mobil are such large and powerful competitors, and because they now compete in several product and geographic markets in the United States, the commission insisted on extensive restructuring before accepting a proposed settlement,” he said in a statement. “This settlement should preserve competition and protect consumers from inappropriate and anticompetitive price increases.”

The impetus for the ExxonMobil XOM merger, like with the Halliburton and Baker Hughes deal, was due to falling oil prices. “This merger will enhance our ability to be an effective global competitor in a volatile world economy and in an industry that is more and more competitive, ” said Lee Raymond and Lucio Noto, chairmen and chief executive officers of Exxon and Mobil, respectively, in a joint statement on the company’s website.

China’s Iraq Oil Problem

The new Iraqi embassy in central Beijing makes the rest of the nearby foreign outposts look rather dull by comparison. The building’s façade is a replica of the Ishtar Gate to Babylon, a gleaming blue brick wall that was once the main entrance to the ancient city located just 50 miles south from modern-day Baghdad. Built by Babylonian King Nebuchadnezzar II and decorated with young bulls and lions, the structure even inspired Saddam Hussein to produce his own replica before the U.S. invasion.

The building, which doesn’t go unnoticed on the quiet dusty street in Beijing where workers nap at lunchtime, is the latest reminder of how close China and Iraq have become.

Thanks to China’s insatiable appetite for oil—last year it passed the U.S. as the world’s largest importer—the country has become Iraq’s top trading partner. After Iraq turned peaceful post-war, China’s state-run oil giants rushed to sign Iraqi contracts. They were largely low-margin, unprofitable deals, but the Chinese need crude and were willing to accept meager deals that other countries weren’t. There are now 10,000 Chinese oil workers in the country.

PetroChina, one of China’s four state-owned energy giants, purchased a stake from Exxon last year in the southern Iraqi oil field West Qurna. It has three other large fields. Sinopec and CNOOC are also pumping crude out of Iraq. According to U.S. Energy Information Administration, Iraq’s exports to China rose more than 50% last year, making it China’s fifth-largest oil partner, behind Saudi Arabia, Angola, Oman and Russia.

“Iraq is very important country for the Chinese,” says Simon Powell, head of Asia oil and gas research at CLSA in Hong Kong. “The Chinese were keen to be involved in Iraq when peace broke out.”

China’s dependence on Iraqi oil explains why Beijing is following today’s Iraqi violence so closely. People’s Daily, the Communist Party’s mouthpiece, runs Iraqi headlines every day. Xinhua, the state-run wire service, covered Iraqi elections. And during the June violence, an official from China’s foreign ministry reminded the press how many Chinese oil workers were in the country.

Until now, China’s role in Iraq has followed a simple directive: extract oil from the world’s sixth-largest oil producing country, no matter the cost. “The Chinese are very simple people,” an Iraqi Oil Ministry official told the New York Times last year. “They don’t have anything to do with politics or religion. They just work and eat and sleep.”

That simplicity is being put to the test in the latest breakout of sectarian violence between Sunnis and Shiites. The Chinese magazine Caixin reported that a Chinese employee of PetroChina working in southern Iraq was kidnapped before being returned. The company was said to evacuate some employees.

So far the Chinese companies have mostly avoided violence. Most of the Chinese oilfield operations are located in the southern Shiite-dominated areas of the country, where Sunni insurgents have yet to venture.

PetroChina’s operations include the Halfaya, Rumaila, Ahdab and West Qurna fields, all located in the middle or southern parts of the country. Sinopec’s Taq Taq field is part of a joint-Iraqi operation in northern Iraq, where it employs no Chinese staff. And CNOOC’s Missan field in southern Iraq hasn’t been disrupted.

There are differing opinions about when, or if, the Chinese oil companies will flee violence. An employee of CNOOC told the state-run Global Times in eleven days ago that the company would pull out immediately once insurgents began attacking Baghdad. The Financial Times reported two weeks ago that ExxonMobil Corp. XOM and BP Plc BP had already started evacuating staff.

“The Chinese aren’t going to throw up their sticks and run away at first sight of trouble,” says CLSA’s Powell. “Is Baghdad a line in the sand?…All the ones we’ve asked aren’t saying much about evacuating people.”

He points out that China is increasingly dependent on Iraqi oil. Under normal circumstances, Iraq could meet a third of the world’s incremental demand, according to a recent IEA report. However, the IEA warned that instability there would allow countries with fewer “above-ground” problems to fill the gap, such as the U.S. and Canada.

Iraq’s beleaguered Prime Minister, Nouri al-Maliki said earlier this year that Iraq “has great confidence in Chinese companies and hopes more Chinese firms will invest in Iraq.”

With militant Sunni groups now controlling great swathes of northern and western Iraq, and threatening the capital Baghdad, and with only a bedraggled Iraqi army and hastily-raised Shi’a militias between them and the Chinese, that confidence looks likely to be sorely tested soon.

How Iraq’s ISIS crisis could lead to a Kurdish oil boom

While violence explodes in Iraq between the brutal al-Qaeda-type Sunni Islamists and the Shiite-led government, there are five million Iraqis for which the unfolding disaster looks set to bring big benefits, as well perhaps as the world’s newest oil state—the Kurds.

Little more than a year ago, Fortune traveled to Iraq’s autonomous northern region as Kurdistan to describe how the deal between ExxonMobil XOM and the Kurdish Regional Government, or KRG, could spark civil war in Iraq, as different factions waged battle for control over the country’s immense oil riches. At the time, Kurdish officials said they were thrilled that the world’s biggest oil company was about to start drilling in their autonomous region, which the International Energy Agency says has 4 billion barrels of proven oil reserves, but which the KRG estimates could in reality be closer to 45 billion barrels. Still, Kurdish officials warned last year that Washington’s muddled, misguided Iraq policy was a disaster in the making. “The U.S. policy is, ‘We got out, finished. Box checked. Move on,’ ” Qubad Talabani, a senior Kurdistan official who became the KRG’s Deputy Prime Minister last month, told me at the time in Kurdistan’s capital Irbil. One major problem, according to Talabani (who was previously KRG representative in Washington) and other officials, was that U.S. officials were determined to keep Iraq as a unified intact country, despite the bitter schisms between the Shiite-dominated government in Baghdad, Iraq’s Sunni minority, and the Kurdish community, which has dreamed of having their own state for decades. “The U.S. still wants Iraqis to be Iraqis first,” Talabani said. “It’s like, if they say it enough it will be so. But it won’t.”

Now Talabani’s words sound eerily prophetic. With the past six days’ violence, Iraq appears to be hurtling towards a three-way breakup: A Sunni-dominated western Iraq dominated by hardline militant jihadist groups; a northern Kurdish territory, and a southern and central Shiite Iraq. With the potential for disintegration comes major upheaval in Opec’s second biggest oil producer and one of the world’s biggest oil nations—and a huge victory for the Kurds.

Just to recap: Iraq’s crisis, which has bubbled all year, exploded into view last Wednesday when militants from Islamic State of Iraq and Syria, or ISIS, stormed into Iraq’s second city Mosul and seized it with barely a fight; government soldiers fled, abandoning an arsenal of U.S. weaponry worth tens of millions of dollars, including armored vehicles, attack helicopters and machine guns with which the U.S. had equipped Iraq’s military, ironically to fight Islamic insurgents. Instead, ISIS fighters took to the sky in a U.S. helicopter and rumbled south laden with American armor, quickly taking Saddam Hussein’s hometown of Tikrit and edging towards the outskirts of Baghdad. On Sunday it also seized Tal Afar, a town of about 200,000 people west of Mosul.

The horrific reality on the ground emerged on Sunday when ISIS posted macabre photographs and messages on Twitter (since removed) claiming that their fighters had executed about 1,700 Iraqi forces in Tikrit. Since there are almost no independent journalists working in the ISIS-held territory, the images are difficult to verify. But the gruesome scenes fueled calls for revenge among Shiites, thousands of whom have rushed to join militias in recent days.

Seen from the prism of Kurdistan—Iraq’s mountainous northern region hemmed between Syria, Turkey and Iran, which enjoys some political autonomy from Baghdad, but which is forbidden to export its own oil—the stunningly quick implosion has been a potential godsend, in effect, sorting out years of deadlocked arguments with Baghdad.

As Iraqi forces abandoned the hugely oil-rich town of Kirkuk last Thursday, Kurdish soldiers, called peshmerga, moved in swiftly, seizing control of an area which on its own has nearly 9 billion barrels of oil reserves. That places Exxon’s new bloc solidly in Kurdish hands rather than in some fuzzy contested territory that both Kurds and Baghdad claim. Kirkuk has been intensely disputed since Saddam drove out the Kurds during the 1980s and 1990s in a brutal ethnic-cleansing campaign, and the Kurds have been determined to recapture it for decades.

Since the U.S. occupation ended in 2012, Iraqi Prime Minister Nouri al-Maliki has made it that the government would blacklist any oil company operating in territory the Kurds claimed was theirs, and shut it out of southern Iraq’s supergiant fields; Exxon effectively ignored the threat, calculating (correctly) that it was too big to shut out. And meanwhile, the Kurds have over the past months quietly opened its own export pipeline to Turkey, steadily putting in place the building blocks of a new country.

Now that new state looks like a reality in all but name. Cunningly, the KRG is unlikely to declare real independence soon. With Iraq in havoc, it hardly needs to. “It’s become very clear to the Kurds that events in the past few days will enable them to declare independence at some point,” Ayham Kamel, Middle East director of the Eurasia Group, told Fortune on Monday. “We are definitely moving in the direction of statehood, but it will not be declared in 2014.”

When I traveled to Kirkuk last year, my Kurdish guide, Hoshang Ishmail, the community development manager for the United Arab Emirates-based Crescent Petroleum, told me that Kurds would readily fight if Baghdad every blocked them from drilling for oil. “Nothing binds us to Iraq except the status quo,” he said. Now that status quo has been ripped apart. And little binds the Kurds and their oil fields to the chaos raging around them.

Exxon’s big bet on shale gas

America’s most profitable company now produces about as much natural gas as it does oil. CEO Rex Tillerson thinks the fracking party has just begun.

Drill pipe ready for use on a rig at Exxon’s Johnson Ranch site outside Fort Worth

For Rex Tillerson fracking is more than a revolutionary approach to drilling oil and gas — it’s part of his personal history. Simply mention the word to the CEO of Exxon Mobil XOM and he starts reminiscing about his days as a young engineer. It was 1976, and Tillerson had been sent to East Texas for his second assignment at the company. His job was to follow around rigs drilling for natural gas and “complete” the wells. That meant experimenting with a process known as hydraulic fracturing, or fracking. By pumping water, sand, and chemicals down into a well at high pressure, he could cause cracks in the stone where the gas was trapped and allow more of it to flow.

That winter Tillerson practically lived out of the back of his car, driving to the company’s district office in Tyler at night so he could run punch-card decks through the computer to design his new fracking programs. Out in the field, when the temperature dropped and the wind blew, the then 24-year-old engineer was grateful for the shelter provided by the big diesel engines that powered the water pumps. “I would stand between those big fracking tanks to stay warm, because the water’s heated,” says Tillerson in a rare interview, laughing at the memory. “I’d stay there until they were ready to crank those babies up, and then I’d have to go out into the weather.”

What’s warming his heart today is the shale gas revolution that technology has enabled. In fact, Tillerson is betting much of his company’s future growth — and a good portion of his legacy — on the promise of fracking. Two years ago Tillerson engineered a $35 billion acquisition of natural-gas producer XTO Energy in large part to buy the company’s hydraulic-fracturing expertise. It is easily the largest deal the energy giant has done since the $88 billion mega-merger with Mobil orchestrated by Tillerson’s predecessor, Lee Raymond, in 1999.

In buying XTO, the 60-year-old Tillerson has further reshaped the company. In 2011, Exxon reported sales of $486 billion — a gargantuan number that could vault it past Wal-Mart WMT to recapture the No. 1 position in this year’s Fortune 500. The $41 billion in profit it earned was the second-largest total in corporate history, behind only the $45 billion record that Exxon set in 2008. Those astronomical earnings have been driven by persistently high oil prices. But today Exxon, the prototypical oil giant, gets about 50% of its production from, and has 50% of its reserves in, natural gas. The company’s stock has risen 77% since Tillerson became CEO at the beginning of 2006, compared with 29% for the S&P 500 index (SPX). To deliver the future returns that its shareholders expect, Exxon needs the XTO purchase — which so far hasn’t lived up to its promise because of falling natural-gas prices — to pay off bigtime. Tillerson has good reason to believe it will.

Over the past several years fracking has unlocked a vast new source of energy supply in the U.S. Advanced forms of the process that Tillerson used in the 1970s, combined with innovative methods of drilling, have enabled energy companies to extract huge quantities of natural gas and oil trapped in shale rock — assets that were previously thought to be either impossible or uneconomic to produce. Production from large shale deposits, or “plays,” such as the Barnett in Texas, the Haynesville in East Texas and Louisiana, and the vast Marcellus in the Northeast, has surged.

This shale gas boom has turned assumptions about the future of the U.S. and global energy picture upside down. Less than a decade ago the consensus was that America was beginning to run out of economically recoverable natural gas and that the country would need to import vast quantities of it from overseas. Now we’re awash in natural gas. U.S. production has increased 28% since 2005. In 2011 about a third of that production was from shale gas, up from just 11% in 2008. By 2035, according to a study by the research firm IHS Global Insight, shale gas will account for 60% of U.S. production.

It is widely thought that the U.S. now has 100 years or more of domestic gas supply at current consumption rates. Already there has been a frenzy of exploration. The shale gas industry employed more than 600,000 workers in the U.S. in 2010, according to IHS, and by 2015 it will contribute some $118 billion to the U.S. economy. (For more on the economic ramifications of this boom, see “America’s New Job Machine Is Heating Up.”) Large shale deposits in South America, China, and Europe mean that it should eventually be a global trend as well. The International Energy Agency estimates that the world currently has a 250-year supply of natural gas. “In my 50 years of following the energy business, this is by far the biggest event that I’ve seen,” says John Deutch, an MIT professor and a former CIA director who last year chaired a Department of Energy subcommittee on shale gas.

The surge in shale gas production has happened so quickly that drilling activity has raced ahead of regulators and public understanding. Fracking has become a dirty word to many — almost a catch-all term for concerns about the consequences of a new onshore exploration boom in the U.S. that has reached into areas previously untouched by the energy industry. Environmentalists have raised concerns about contamination of freshwater aquifers, pollution from truck traffic, increased greenhouse gas emissions, and even earthquakes. It didn’t help fracking’s reputation that Gasland, a 2010 Oscar-nominated documentary about the dangers of shale drilling, caught the public’s attention with its footage of contaminated tap water that could be lit on fire, though the veracity of some of the film’s content was later challenged.

Still, if there is a single factor that could slow shale gas development, it’s environmental backlash. Already New York (which potentially has a lot of Marcellus Shale gas) and New Jersey (which probably doesn’t) have temporarily banned fracking. Both France and Germany have imposed moratoriums on shale gas drilling. And in November, the Environmental Protection Agency released a 190-page report explaining how it plans to conduct a study of the impact of shale gas on drinking water that should be ready by 2014. Meanwhile, the shale gas industry continues to boom.

Exxon CEO Rex Tillerson

Tillerson brushes aside environmental concerns as manageable and overblown. He regards the shale surge as unambiguously good news for the U.S. and the world, the latest triumph for an industry that periodically invents new ways to find and harness fossil fuels from the earth. “The most important thing for people to understand about shale gas is it’s just yet the next big resource opportunity for us,” he says. “The world’s economy has a voracious appetite for energy, so thank God we can do this.”

But the growth of shale gas is also, he believes, part of a larger narrative as the world shifts to a greater reliance on so-called unconventional resources — and we are at a decisive moment. To understand this transition, it’s important to examine why the country’s largest energy company is staking part of its future on shale and how it plans to make the most of its new resources.

It’s just after noon on a windy Tuesday in southeastern Oklahoma, and the rig at XTO Energy’s Gayle 1-32H well is about to breach the Woodford Shale at a depth of 11,700 feet after 38 straight days of 24-hour drilling. Inside the kitchen of the doublewide that serves as both office and bunk for the crew, a group of XTO drilling and production supervisors are eating banana pudding out of paper cups and discussing the geological plan for the well. A monitor nearby shows the drilling progress in real time. A TV has Criminal Minds on mute.

This is Singing Cowboy country. Gene Autry himself grew up nearby, and the area has always had a lot of ranching. Now Ardmore, the biggest municipality in the area, is experiencing a classic mining-town boom. The hotels are booked. The Wal-Mart is always busy. XTO has just started building a new two-story regional office off the Ardmore exit of I-35, and it’s already considering an expansion.

The rig at the Gayle well is a state-of-the-art piece of equipment that is drilling its first hole. It cost $18 million to build, and XTO has contracted it for three years at a cost of $24,000 per day. It’s one of 12 rigs the company has running full-time in the Woodford right now. The company has 65 wells in the area, but it’s now drilling at a pace to finish about 130 wells per year. “We’re stepping things up here,” says Guy Haykus, XTO’s regional production supervisor. “Right now this is a limelight area.”

The Woodford holds a particular appeal for XTO and other shale drillers today because it produces a lot of “wet” gas. Regular natural gas, or “dry” gas, is mostly methane. That’s what we use to fuel our stoves, heat our homes, and generate power at utility plants. But the price of dry gas has tumbled. Over the past decade, it has averaged $5.78 per million BTUs. Recently it fell below $2. Exxon and other companies have been shifting rigs to areas that produce a more complicated mix of hydrocarbons that includes “wet” natural-gas liquids such as ethane, propane, and butane. Those liquids are used as chemical feedstock or as additives in gasoline, and they fetch a higher price than methane right now.

After the drill enters the Woodford, the crew at the Gayle site will slowly turn it sideways and then drill horizontally for another 5,000 feet through the shale. That makes it possible to hydraulically fracture a large section of rock from a single well. (See “How Fracking Works” graphic to the right.) It’s the combination of horizontal drilling with fracking that has enabled the massive growth of shale gas production.

The shale gas revolution began almost right underneath Exxon’s feet. In the early 1980s a visionary, independent natural-gas driller named George Mitchell began experimenting with ways to get gas out of the Barnett Shale, which ranges all across the Dallas-Fort Worth area — even under Exxon’s headquarters in Irving, Texas. Geologists have always known that shale contains trapped gas and oil. In fact, shale is the deep layer of rock where much of the traditional natural-gas supply was “cooked.” But extracting hydrocarbons from the rock was thought to be too difficult and expensive to justify.

Mitchell, however, was convinced it could work. After nearly 20 years of trial and error, Mitchell Energy developed a formula for fracking with water and sand that worked spectacularly well. The company’s production of natural gas in the Barnett soon spiked. In 2002, Mitchell, then 82, sold his company to Devon Energy DVN for $3.2 billion. Devon was able to combine its expertise in horizontal drilling with Mitchell’s fracking techniques and boost production even more. Soon Devon and other companies were pulling huge amounts of gas out of the Barnett.

Exxon was a little slow to recognize the magnitude of what was happening right on its doorstep. Not long after he became CEO in 2006, Tillerson decided to investigate. He formed a joint venture with an independent driller in the Barnett and leased a bunch of acreage. “I said, ‘All right. Go out and develop a position, and my primary objective is I want to understand this, and I want to learn about it,’ ” says Tillerson. After about a year he sold off the assets. But the Exxon CEO had learned a couple of important things: First, that shale gas was going to be significant. And second, that Exxon was late to the party. Most of the best acreage in the established plays had already been leased, driving up prices.

In July 2009, Tillerson got a call from the Jefferies & Co. oil and gas banker Jack Randall, an old friend from the marching band at the University of Texas. (Tillerson played the drums, and Randall the trumpet.) Randall, a member of the board of XTO Energy of Fort Worth, told Tillerson that XTO chairman Bob Simpson was interested in selling the company. XTO was an early player in the Barnett and had grown into the largest natural-gas producer in the U.S. Tillerson and Simpson began negotiating, and on Dec. 14, 2009, they announced a $41 billion all-stock acquisition of XTO by Exxon, with a 25% premium for XTO shareholders. The deal got a mixed reception from Wall Street. By the time it closed, a dip in Exxon’s stock price had pushed the value down to $35 billion.

Tillerson felt a bold move was justified. “The strategic decision I made was, Okay, we’re going to enter this wholeheartedly, and we want a big position now,” says Tillerson. “We can build it, and it will take several years for us to get to a material position. Or we can buy it.” One factor in favor of buying it was that shale drilling is extremely labor-intensive compared with traditional oil and gas development. Rather than poking a hole in a big reservoir and letting the crude flow, shale development requires repeated drilling and fracking to unlock gas from new corners of a play. To Tillerson, retaining XTO’s field engineers and executives, and their knowledge of shale development, would be key to making the merger successful.

That imperative led the company to take a new approach to integrating XTO. Traditionally Exxon has been known for snapping up companies for their underlying assets and forcing its own ruthlessly efficient culture on the conquered. This was very different. Tillerson made it quite clear from the beginning that XTO would retain its own identity, and that, in fact, Exxon would be learning a thing or two from its new addition. He even coined a phrase for the process: reverse integration. Evidence of the subsidiary’s continued autonomy was obvious at the drill site in Oklahoma. The engineers at the Woodford site wore XTO-branded hard hats, and their business cards said nothing about Exxon.

Since the acquisition, XTO’s proven shale gas reserves have increased 81%, through a combination of strategic acquisitions and development of existing acreage, to 82 trillion cubic feet — enough to meet demand in the Dallas-Fort Worth area for 150 years. “Exxon made a bet on natural gas, and so far they are underwater, because the price of gas in the U.S. has collapsed,” says Fadel Gheit, the longtime Oppenheimer energy analyst. “That doesn’t mean that they are wrong, because their investment horizon is not the same as Wall Street’s.”

Tillerson believes that the shale investments will pay off for Exxon over 25 to 30 years, a point he emphasized to analysts in March when explaining the company’s careful approach to developing its shale assets. “Now, that is not the same model that all the other players out there would follow because they don’t have the size,” he said. “They don’t have the technology resources, the research resources standing behind them. They don’t have the financial resilience.” He added, “We can be patient.”

Why is Tillerson so confident in the future of natural gas? In December, Exxon released its annual “Outlook for Energy,” which is the company’s view of future demand and consumption trends out to the year 2040. The biggest single theme in the research, which Exxon uses to guide its strategic planning, was the growing demand for electricity. Exxon estimates that worldwide electricity demand will increase 80% by 2040 as hundreds of millions in the developing world achieve a middle-class lifestyle. An increasing amount of that electricity will be generated by natural gas, which will pass coal as the world’s second-largest fuel source, behind crude oil, by 2025.

Exxon has been preparing to meet the emerging demand for natural gas for some time. In Qatar, which has huge natural-gas reserves in its offshore North Field, the company has invested heavily in facilities to produce and export liquefied natural gas, which is supercooled and transported in massive tankers. The company has a $15.7 billion LNG project in Papua New Guinea that will begin supplying gas in 2014 to customers in Asia. And Exxon is also a partner in the massive, Chevron-led, $37 billion Gorgon LNG project in Australia.

Over the next five years Exxon plans to invest $185 billion in its business, most of it to explore for and develop new sources of oil and gas. The cost of the “next barrel” is on the rise, says Tillerson, as easy-to-access reservoirs are depleted. The company believes that deepwater projects will yield huge production gains in coming decades. It is working on a partnership to explore the Arctic and the Black Sea with Russian oil giant Rosneft, and last October it signed a deal to explore for oil in Kurdistan. But it’s also counting on robust growth from unconventional new sources such as oil sands, tight oil, and, of course, shale gas.

Just how much shale gas the U.S. has is a matter of some debate. The most common refrain, and one that President Obama used in his State of the Union speech, is that we now have 100 years of natural-gas supply in the U.S. from shale. That is based on a report issued last year by an industry organization called the Potential Gas Committee. But skeptics have pointed out that much of that total is “unproven.” Because the development of shale is relatively new, most of the potential supply has yet to be fully explored. While it’s certainly possible that some shale plays will turn out to be less rich than hoped, it’s also possible that improving technology will allow Exxon and other drillers to extract even more than we can imagine today.

With his silver hair, dark suits, and deep Texas drawl, Tillerson is the very picture of a big oil executive. In person, he comes across as relaxed and extremely comfortable in his own skin. Until, that is, the subject of environmental concerns and the media coverage of the shale gas boom comes up. Then suddenly his temper flashes. “I think we have to deal in facts,” he says, his voice rising. “The assertions that our opponents make — why don’t you ask them to produce some facts, produce something? I mean, prove it.”

The U.S. shale gas industry employs some 600,000 workers, like these Texas roughnecks.

Tillerson believes the discourse about shale has been hijacked and distorted. He says that Exxon is transparent about its practices and points out, for instance, that the company was an early proponent of disclosing the chemicals that it uses in fracking. He argues that shale drillers are being held to an unrealistic safety standard. “What’s happened is the tables have been turned around now to where we have to prove it’s not going to happen,” he says. “Well, that is a very dangerous exchange to get into because where it leads you from a regulatory and policy standpoint is to govern by the precautionary principle. And the precautionary principle will absolutely undermine the economy.” He adds, “If you want to live by the precautionary principle, then crawl up in a ball and live in a cave.”

It’s true that attacks on fracking have at times veered into fear-mongering territory. But shale drillers have often met legitimate claims of problems with defiance — and caused themselves more trouble in the process. “Unfortunately, the industry’s response too often has been just to argue that hydraulic fracturing can’t possibly cause any problems,” says Fred Krupp, president of the Environmental Defense Fund and a member of the Energy Department’s shale gas subcommittee last year. “When that kind of denial meets real and actual issues, the disconnect results in a lot of anger. And it erodes trust.”

It has also led to some resistance from shareholders. An advocacy group called As You Sow, representing a coalition of green-oriented investors, has proposed a shareholder resolution calling for Exxon to issue a report on the risks associated with its development of shale gas. In late March the Securities and Exchange Commission rejected a request from Exxon to exclude a vote on the resolution at its annual meeting in May. (A similar resolution last year garnered 28% of votes cast.) In its letter to the SEC, Exxon said that it was not subject to any fines or government-enforcement actions related to hydraulic fracturing. That may be true if you consider only the process of fracking itself, which happens deep underground. But a search of Pennsylvania’s Department of Environmental Protection database shows that last year XTO was cited for 81 violations for its drilling activity in the Marcellus. And on Dec. 10, 2010, the company was fined $150,000 for “improper casing to protect fresh water.”

Shale gas drilling isn’t going away. It’s too important to the economy, and there’s too much money to be made. The environmental impact also can’t be totally eliminated. Fracking a typical well requires millions of gallons of water, which must then be disposed of safely. But many of the problems can be addressed. If drillers institute and follow high standards on cementing wells as they pass through aquifers and on proper handling of the water that flows back to the surface after fracking, spills and water contamination can be minimized. They can also lower the greenhouse gas impact of shale drilling by using “green completion” equipment that captures methane and volatile organic compounds from the drilling water and prevents them from escaping. This month the EPA is expected to finalize new regulations that make green completions mandatory on all new wells. The American Petroleum Institute, the industry’s largest trade association, has argued that the industry needs more time to comply.

Given Tillerson’s long experience with fracking, it’s perhaps not surprising that he takes criticism of shale drilling a bit personally. To him, the shale boom is a great example of the fundamental effectiveness of his industry — the kind of achievement that always seems to be unappreciated. “We go through this every time we go to a new area to develop,” he says. “It’s just part of how society deals with having their energy needs met. What I find interesting about the U.S. relative to other countries is in most every other country where we operate, people really like us. And they’re really glad we’re there. And governments really like us. And it’s not just Exxon Mobil. They admire our industry because of what we can do. They almost are in awe of what we’re able to do. And in this country, you can flip it around 180 degrees. I don’t understand why that is, but it just is.”

If Tillerson wants to fully realize the promise of shale gas in the U.S., he might need to figure out why.

Kinder Morgan gets the go-ahead

The California Public Utilities Comission today issued an order that allows the $15.2 billion management buyout of pipeline operator Kinder Morgan (KMI) to proceed. Kinder Morgan didn’t get everything it wanted in the ruling, which resulted from an ongoing fight it is having with several big oil companies, including ExxonMobil (XOM) and Valero (VLO). But it does mean it can now complete a deal whose existence was first announced almost exactly one year ago. The state regulator’s approval was the last of many hurdles the deal needed to close.

When the deal was announced last year, it was the second-largest private equity deal in history. Some shareholders have complained about the seemingly conflicting roles played by Goldman Sachs (GS); you can read a fuller account of the deal’s twists and turns here.

Kinder Morgan has yet to announce the California ruling. Its spokesman, who gave a comment this afternoon to Reuters, says the deal is still scheduled to close “in the second quarter.”

Kinder Morgan: a window onto private equity

I have an article in the current issue of Fortune (the full text is here) about the $15.2-billion deal to take private Kinder Morgan Inc., (KMI) a natural-gas pipeline company in Houston. We put it online today. This story has lots of big names on Wall Street: Goldman Sachs (GS), which is the deal’s investment banker, lead investor and debt-syndicate leader; Carlyle Group, another major investor; Blackstone Group and Morgan Stanley (MS), who advised the company’s board of directors; and CEO Richard Kinder himself, a former president of Enron and one of the most brilliant operators and financial engineers in the energy business.

It’s a complexstory because it’s a complex deal. But through this one company you can understand all the cross-currents at play in the world of private equity today. Here’s a snippet:

It’s not just the war chests that are bigger this time; the potential conflicts of interest are too. Wall Street investment banks have plunged full force into the private-equity business, further clouding their already compromised judgment as corporate advisors. “Hostile” takeover bids by buyout firms have become far less common, as corporate managers have learned to share in the lucrative paydays that PE firms promise.

And the temptations have only become greater with the proliferation of so-called club deals, in which multiple private-equity firms team up to make bigger and bigger offers, which typically go unchallenged, for companies previously considered too large to devour. In October the Justice Department said it was beginning a preliminary investigation into potentially anticompetitive behavior by private-equity firms in club deals.

Since we went to press there’s been another interesting development in the story, one that Kinder Morgan hasn’t bothered disclosing yet to shareholders. In late April the California Public Utility Commission issued a preliminary ruling that would allow the deal to move forward by late May. The California regulator is involved because a group of oil companies–Valero (VLO), Ultramar, BP (BP), ExxonMobil (XOM) and Chevron (CVX) – opposed the merger as part of a longstanding business dispute having to do with rates Kinder Morgan charges to transport oil on its pipelines. This week the oil companies asked the commission to delay its final ruling pending Kinder Morgan’s adherence to certain conditions requested by the oil companies. If the CPUC rules against Kinder Morgan, this deal could get delayed as late as September. If the commission rejects the request, Rich Kinder could get his company by Memorial Day.